Tuesday, April 12, 2016

Short notes on Various types of Banking System

Important Short notes:
1) Group Bank: Group Bank is a system of banking under which there will be holding company controlling the subsidiary companies which carry out banking business. In some cases, both the holding and subsidiary companies may carry out banking business. An example in India is SBI which has many subsidiary banks such as State Bank of Mysore, State Bank of Indore, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala and State Bank of Travancore. These subsidiaries carry out banking and other operations such as leasing, merchant banking and so on.
Merits of Group Banking: Following are the advantages of Group Banking:
a)      Efficient Management: The holding company stimulates efficiency of the group banks. The group banks are efficiently managed being under the overall control of Holding Company.
b)      Adequate Liquidity: there is high degree of liquidity of the concerned group being the whole group of banks is controlled and managed by one parent company. The member banks have to maintain the requisite degree of liquidity.
c)       Economical: It is an economical system of banking, because many expenses such as advertisement and publicity are done collectively be the group as whole under the direct control of the holding company.
d)      Specialization: In Group banking, different subsidiary companies tend to specialize in different aspects of banking. This promotes the overall efficiency of the group system.
Disadvantage of Group Banking: Main demerits of Group Banking are as under:

a)      Right Control: There is rigid control in Group Banking due to lack of flexibility which often leads to corruption.
b)      Less Mobility of Funds: Funds are less mobile in Group Banking than Branch banking system.
c)       Few Branches: Group Banking has relatively very few branches as compared to Branch Banking system.
2) Chain Bank: Chain Bank is a system under which different banks come under a common control through common shareholders or by the inter-locking of directors. An example in India is KarurVysya Bank and Lakshmi Vilas Bank having their head offices located in the same place, viz., Karur and sharing common directors by which they may have common management policy.
Merits of Chain Banking: Following are the advantages of Chain Banking system:
a)      This system of banking is found most suitable to meet the local needs of credit and finance;
b)      The system facilitates appropriate use of the limited resources.
c)       The chain banking system exhibits efficient system of management;
d)      This system is not prone to risk-taking;
e)      It is the cheap system of banking and not too much expensive.
Demerits of Chain Banking: Chain Banking system has certain demerits:
a)      Profitability remains limited due to limited risk-taking.
b)      The chain banks generally do not conduct the programmes of social welfare and development;
c)       This system of banking promotes the tendency of bossism in management.
3) Pure Banking: Under pure Banking, the commercial banks give only short-term loans to industry, trade and commerce. They specialize in short term finance only. This type Of banking is popular in U.K.
4) Mixed Banking: Mixed banking is that system of banking under which the commercial ban s perform the dual function of commercial banking and investment banking, i.e., it combines deposit and lending activity with investment banking. Commercial banks usually offer both short-term as well as medium term loans. The German banking system is the best example of mixed Banking.
5) Relationship banking: Relationship banking refers to the efforts of a bank to promote personal contacts and to keep continuous touch with customers who are very valuable to the bank. In order to retain such profitable accounts with the bank or to attract new accounts, it is necessary for the bank to serve their needs by maintaining a close relationship with such customers.
6) Narrow Banking: A bank may be concentrating only on collection of deposits and lend or invest the money within a particular region or certain chosen activity like investing the funds only in Government Securities. This type of restricted minimum banking activity is referred to 'Narrow Banking’.
Key Features of Narrow Banks
a)      No lending of deposits. It reduces risk significantly at the cost of low return on investment for depositors and shareholder.
b)      Investment in extremely high liquidity typically in short-term assets e.g. government bonds.
c)       Extremely high asset security.
d)      Lower interest rates are paid to depositors as a result of no lending to borrowers.
e)      Possibly specific regulatory framework with higher level of scrutiny and operational or investing restrictions.
f)       No off balance sheet assets.
g)      No derivatives are there is narrow banking.
h)      High degree of institutional transparency e.g. regular real time disclosure of financial records.

7) Correspondent Banking: Correspondent banking system is developed to remove the difficulties in unit banking system. It is the system under which unit banks are linked with bigger banks. The big correspondent banks are linked with still bigger banks in the financial centers. The smaller banks deposit their cash reserve with bigger banks. The bigger banks with whom such deposits are so made are called correspondent banks. Therefore, correspondent banks are intermediaries through which all unit banks are linked with bigger banks in financial centers. Through correspondent banking, a bank can carry-out business transactions in another place where it does not have a branch.

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